published: 4.8.04

The Bond Market Association Projects Stable Net Treasury Coupon Issuance Volume in Second Quarter; Rates To Rise Modestly Over the Next Few Quarters

Date: April 8, 2004
Contact: Jon Teall, 646.637.9279

New York, NY - Net U.S. Treasury issuance will rise slightly in the current quarter, increasing 4.1 percent over issuance in the first quarter of 2004, according to the quarterly survey of The Bond Market Association's Government Securities Research Committee. Despite the projected growth of the federal deficit in 2004, the survey's median response predicts a decline of 1.3 percent in issuance in the second quarter when compared to the second quarter of 2003, though gross issuance is expected to be about 25 percent higher than a year ago. The consensus expectation is for the deficit to peak this year and begin to recede thereafter.

"Even with the current deficit projections, growth in Treasury issuance is expected to stabilize as the flow of tax receipts picks up during the second quarter," said Michael Decker, senior vice president for research and policy at the Association.

In gross terms, survey participants project $177 billion in coupon issuance this quarter with about 44 percent of that coming in 2-year notes. Another 14 percent will take the form of 3-year notes. The 5-year note will account for about 27 percent of gross new coupon issuance while 15 percent, or $27 billion, will be in 10-year notes. This projected issuance pattern generally tracks the Treasury borrowing breakdown in the first quarter. Relative to rates at the time the survey was conducted - between March 22 and March 26 - survey participants expect Treasury yields to rise in the second and third quarter but remain below last year's high of slightly above 4.5 percent for the 10-year note. The note jumped 26 basis points to 4.10 percent after the survey was taken with the announcement of an unexpectedly high employment number April 2.

"The sell-off seen following the release of the positive jobs survey April 2 suggests yields could end up being close to the high end of the forecasted range," noted Mr. Decker.

The median forecast for the 10-year Treasury note is for a 4.08 percent yield at the end of the second quarter and 4.33 percent at the end of the third quarter. The forecasted yields indicate a modest flattening of the yield curve from what is a historically steep shape today. The median response of survey participants calls for the spread between the 2- and 10-year note to increase a single basis point from the yield curve at the end of March to 2.28 percentage points and then narrow to 2.19 percentage points by the end of the third quarter.

The Association's forecast is issued on a quarterly basis and reflects the results of a survey of members of the Government Securities Research Committee, comprised of trading strategists and research analysts with a focus on the U.S. government and agency securities markets.

Survey participants reached a consensus view similar to the one adopted last quarter that investors should generally keep their portfolios about where they are currently. There was a preference among panelists for overweighting at the short end and also some sentiment for increased weighting at the long end of the duration spectrum while underweighting in the intermediate duration sector.

"Considering the interest rate fluctuations over the past several weeks, many market participants are advising a 'wait and see' approach to investing until the direction of the interest rate cycle becomes clearer," said Steven Davidson, vice president and director of research for the Association.

The members of The Bond Market Association's Government Securities Research Committee consist of individuals from ABN AMRO Bank, Barclays Capital Inc., Bear, Stearns & Co. Inc., Citigroup Global Markets Inc., Credit Suisse First Boston LLC., Deutsche Bank Securities Inc., First Tennessee Capital Markets, Goldman, Sachs & Co., HSBC Securities (USA) Inc., J.P. Morgan Securities, Inc., Lehman Brothers Inc., Merrill Lynch Government Securities Inc., Mizuho Securities USA Inc., Morgan Stanley & Co. Incorporated, Nomura Securities International, Inc., RBS Greenwich Capital and UBS Warburg LLC.

The Bond Market Association, with offices in New York, Washington, D.C. and London, represents securities firms and banks that underwrite, trade and sell debt securities globally.